06-Bond-valuation - Bond Valuation Key features and...

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Bond Valuation  1 Bond Valuation Key features and terminology Valuation model Cash flows Risk Yield to maturity (YTM) Yield to call (YTC)
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Bond Valuation  2 Key Features of a Bond Indenture : legal agreement Issue date : when issued Maturity date : repayment date Par value : principal to be repaid Coupon rate : stated interest rate
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Bond Valuation  3 Value = + . . . How can we value assets on the basis of expected future cash flows? CF 1 (1 + R d ) 1 CF 2 (1 + R d ) 2 CF n (1 + R d ) n The discount rate (R d ) is the required rate of return or opportunity cost of capital on debt, and is driven by the: interest rates (in general) risk of cash flows
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Bond Valuation  4 An annuity (the coupon payments). A lump sum (the maturity, or par, value to be received in the future). Value = INT(PVIFA Rd, n ) + M(PVIF Rd, n ) The cash flows of a bond consist of:
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Bond Valuation  5 0 1 100 1,000 Value = = $1,000 Find the value of a 1-year 10% annual coupon bond when R d = 10%. $1,100 1.10
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Bond Valuation  6 0 10 100 1,000 1 2 100 100 Find the value of a similar 10-year bond.
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Bond Valuation  7 Enter: Solve for PV = $1,000 Two Ways to Solve Using tables: Value = INT(PVIFA 10%,10 )+ M(PVIF 10%,10 ) Calculator: N I/YR PV PMT FV 10 10 100 1000
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Bond Valuation  8 Rule: When the required rate of return (R d ) equals the coupon rate, the bond value (or market price) equals the par value.
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This note was uploaded on 10/04/2011 for the course FIN 6406 taught by Professor Sturm,r during the Spring '08 term at University of Central Florida.

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06-Bond-valuation - Bond Valuation Key features and...

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